US Securities and Exchange Commission v. Patel et al

Filing 255

ORDER denying 224 Motion for Summary Judgment; denying 248 Motion to Strike 234 Response to Motion. So Ordered by Chief Judge Steven J. McAuliffe. (jab)

UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Securities and Exchange
Commission,
Plaintiff
v.

Civil N o . 07-cv-39-SM
Opinion N o . 2011 DNH 129

Eric Jaeger and
Jerry A . Shanahan,
Defendants
O R D E R
In February of 2007, the Securities and Exchange Commission
(“SEC”) filed suit against ten defendants, seeking injunctive
relief under 15 U.S.C. § 77t(b) and 15 U.S.C. §§ 78u(d) and (e)
for alleged violations of the Securities Act of 1933, the
Securities Exchange Act of 1934, and several rules promulgated
under those statutes. The court granted various motions to
dismiss and the SEC filed a First Amended Complaint.

Again,

several defendants moved to dismiss. And, again, the court
granted those motions, either in full or in part.

Subsequently, the SEC settled its claims against a number of
defendants.

Two claims remain against Defendant Eric Jaeger: an

aiding-and-abetting claim under Rules 10b-5(a) and (c) (Count
III) and a falsification-of-books-and-records claim (Count I V ) .
Jaeger moves for summary judgment.

The SEC objects. For the

reasons discussed, Jaeger’s motion is denied.

Standard of Review
When ruling on a motion for summary judgment, the court must
“view the entire record in the light most hospitable to the party
opposing summary judgment, indulging all reasonable inferences in
that party’s favor.”
(1st Cir. 1990).

Griggs-Ryan v . Smith, 904 F.2d 112, 115

Summary judgment is appropriate when the record

reveals “no genuine issue as to any material fact and . . . the
moving party is entitled to a judgment as a matter of law.”
R. Civ. P. 56(c).

Fed.

In this context, “a fact is ‘material’ if it

potentially affects the outcome of the suit and a dispute over it
is ‘genuine’ if the parties’ positions on the issue are supported
by conflicting evidence.”

Int’l Ass’n of Machinists & Aerospace

Workers v . Winship Green Nursing Ctr., 103 F.3d 196, 199-200 (1st
Cir. 1996) (citations omitted).

Nevertheless, if the non-moving party’s “evidence is merely
colorable, or is not significantly probative,” no genuine dispute
as to a material fact has been proved, and “summary judgment may
be granted.”

Anderson v . Liberty Lobby, Inc., 477 U.S. 242, 249-

50 (1986) (citations omitted).

The key, then, to defeating a

properly supported motion for summary judgment is the nonmovant’s ability to support its claims concerning disputed
material facts with evidence that conflicts with that proffered
by the moving party.

See generally Fed. R. Civ. P. 56(c).

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It

naturally follows that while a reviewing court must take into
account all properly documented facts, it may ignore a party’s
bald assertions, unsupported conclusions, and mere speculation.
See Serapion v . Martinez, 119 F.3d 982, 987 (1st Cir. 1997).

Discussion
I.

Count III.
In a prior order, the court construed the SEC’s claims

against Jaeger in Count III of the First Amended Complaint as
follows:
Because the SEC has failed to state Securities Act
claims against Jaeger under any of the three theories
it advanced, it has necessarily failed to state a claim
for direct liability under Rule 10b-5. The SEC has,
however, stated aiding-and-abetting claims against
Jaeger under Rules 10b-5(a) and ( c ) , based on his
involvement in the transactions with iPolicy (Am.
Compl. ¶¶ 160- 2 ) , Centricity (¶¶ 168-69), and Everest
(¶¶ 218- 2 3 ) , subject to the same proviso that was
applied to Kirkpatrick’s Securities Act course-ofbusiness claims.

September 3 0 , 2009 Order (document n o . 209) at 118 (emphasis
supplied).

To establish its aiding-and-abetting claims against Jaeger
under Rules 10b-5(a) and ( c ) , the SEC must prove that:
(1)

a primary violation 10b-5(a) and/or (c) was
committed; and

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(2)

Jaeger was aware of that primary violation; and

(3)

Jaeger knowingly or recklessly provided
substantial assistance to the primary violator(s)
of the rule.

See 15 U.S.C.A. § 78t(e).

See also SEC v . DiBella, 587 F.3d 553,

566 (2d Cir. 2009); SEC v . Johnson, 530 F. Supp. 2d 325, 332
(D.D.C. 2008).

Jaeger’s motion insists that the “most that can be said is
that [he] was one of several employees who assisted with certain
elements of these three transactions, but without any role or
indeed knowledge of how the revenue from them would - or would
not - be recognized.”

Reply Memorandum (document n o . 249) at 2 .

But, the SEC points to sufficient evidence, if credited by a
trier-of-fact, to establish Jaeger’s aiding-and-abetting
liability.

First, there is ample evidence to support the conclusion
that employees of Cabletron, Enterasys, and Aprisma violated
Rules 10b-5(a) and (c) as part of the scheme(s) to recognize
revenue from transactions that did not generate recognizable
revenue, thereby misstating revenue amounts on corporate
financial statements. As to the second and third elements, the
SEC points to sufficient evidence to create genuine (i.e., trialworthy) issues of material fact:
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Jaeger negotiated and finalized the iPolicy, Everest
and Centricity transactions [at a time] when: 1 ) he was
fully apprised of the criteria for revenue recognition;
2 ) he was one of Cabletron’s Authorized Representatives
to approve sale transactions that did not meet the
criteria; 3 ) he took the lead in drafting the guidance
on revenue that was reported at analyst calls; 4 ) he
reviewed and made changes to the financial statements
throughout the relevant period and in particular for
the quarters in which revenue was reported on these
three transactions. Jaeger was responsible for giving
transaction documents to accounting. Jaeger interfered
with the process of giving proper documentation to
outside auditors, who could have corrected the improper
revenue for the transactions. Jaeger aided and abetted
the primary violation of Section 10(b) of the Exchange
Act and Rule 10b-5 thereunder.

Memorandum in Opposition to Summary Judgment (document n o . 234)
at 2 3 .

With respect to the iPolicy transaction, for example, the
SEC has pointed to evidence suggesting that Jaeger was fully
aware of (and actually negotiated) the terms of the transaction,
by which iPolicy would receive funds from Cabletron and then
immediately turn around and purchase goods with those funds from
Aprisma.

See, e.g., Memorandum in Opposition to Summary

Judgment, Exhibits 1 9 , 2 0 , and 2 1 . In fact, because the iPolicy
transaction was “nonstandard,” it had to be approved by an
authorized Cabletron Representative like Jaeger.

See Exhibit 4 .

There is also evidence suggesting that Jaeger was aware that
Aprisma needed to (and, in fact, would) recognize revenue from

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the iPolicy transaction, in order to meet its quarterly income
projections.

See, e.g., Exhibit 27 (e-mail dated April 1 0 , 2001,

from Jaeger to the CEO of Cabletron and the CEO of Aprisma,
saying “I spoke today with Lisa Lentz and Jack Huffard.

We

clear[l]y do not have enough investment deals in the pipe to
close the gap.

Now is the time to get creative. I am pushing

Jack to look for more security MSPs and to cull through his other
deals.

Aprisma must also help source more deals.”); Exhibit 26

(Transcript of June 2 7 , 2001, Q1 FY02 Cabletron conference call,
at which Jaeger was present and at which Aprisma announced its
(improperly calculated) quarterly earnings, which included
revenue from the iPolicy transaction).

And, finally, there is evidence supportive of the SEC’s view
that Jaeger had a sufficient understanding of accounting
principles to fully realize that Aprisma could not properly
recognize revenue from the transaction with iPolicy.

See

generally Exhibit 52 (describing Jaeger’s extensive experience,
as an attorney in private practice, with “public offerings,
venture capital financings, mergers and acquisitions and
corporate partnering”); Exhibit 10 (showing Jaeger’s familiarity
with proper revenue recognition principles, as he prepared profit
and loss statements for Cabletron’s four operating companies);
Exhibit 4 (discussing “Cabletron’s General Revenue Recognition

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Rules,” outlining end-of-quarter booking requirements, and
identifying Jaeger as one of only four “Authorized Cabletron
Representatives,” by whom all terms and conditions of
transactions with resellers had to be reviewed and approved);
Exhibit 34 (e-mail in which Jaeger wrote, “I would like to spend
at least 15 minutes w/ Piyush and Henry taking them through the
balance sheet, the changes we have made and the explanations for
the issues that remain.

Henry is on the front lines with the

investors, and we do not want him caught off-guard.”); Exhibit 46
(series of e-mails in which Jaeger was asked for “all of the R&D
investment related documents for deals that closed during Q1,” so
they could be provided to the outside auditors - documents which
Jaeger apparently never provided to the outside auditors).

II.

Count IV.
In its order of September, 2009, the court described the

claims in Count IV of the SEC’s amended complaint against Jaeger
as follows:
The amended complaint alleges that Jaeger negotiated
and finalized a reciprocal purchase agreement with
Everest (Am. Compl. ¶ 218) that included terms that
would preclude revenue recognition under GAAP (¶¶ 2192 2 ) , yet he failed to inform the finance department of
those terms (¶ 2 9 6 ) , thus causing the creation of
corporate books and records that falsely described the
transaction. Again, presuming that one who finalizes a
deal has a responsibility to report its terms to the
finance department, the SEC has stated a falsification-

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of-books-and-records claim against Jaeger under 15
U.S.C. § 78m(b)(5) and Rule 13b2-1.
September 3 0 , 2009 Order at 119. That statute provides that “No
person shall knowingly circumvent or knowingly fail to implement
a system of internal accounting controls or knowingly falsify any
book, record, or account described in paragraph (2).”
§ 78m(b)(5).

15 U.S.C.

And, Rule 13b2-1 provides that “No person shall

directly or indirectly, falsify or cause to be falsified, any
book, record or account subject to Section 13(b)(2)(A) of the
Securities Exchange Act.”

17 C.F.R. § 240.13b2-1.

With respect to the “knowing” requirement of section
78m(b)(5), the SEC need not demonstrate that Jaeger was actually
aware that he was violating the law.

Instead, it need only show

that he was aware of the falsification and did not act through
ignorance, mistake, or accident.

See, e.g., U.S. v . Reyes, 577

F.3d 1069, 1080 (9th Cir. 2009); SEC v . Kelly, 765 F. Supp. 2d
301, 322 (S.D.N.Y. 2011).

Consequently, evidence that Jaeger

misled company auditors can support the SEC’s claim that he
knowingly circumvented a company’s system of internal accounting
controls.

See, e.g., SEC v . Retail Pro, Inc., 673 F. Supp. 2d

1108, 1142 (S.D. Cal. 2009).

Similarly, evidence that Jaeger

“contributed to the issuance of materially misleading financial
statements,” is sufficient to establish liability under Rule

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13b2–1.

SEC v . Lucent Technologies, Inc., 610 F. Supp. 2d 342,

370 (D.N.J. 2009).

In addition to the evidence summarized above, the SEC points
to the following in support of its claims: (1) as early as 1999,
Jaeger was made aware of the revenue recognition criteria for
Cabletron and its subsidiaries (Exhibit 4 ) ; (2) all corporate
press releases concerning “revenue, revenue growth, gross margin,
operating margin, etc.” had to be approved by one of two people:
Piyush Patel or Eric Jaeger (Exhibit 7 ) ; Jaeger controlled, or
had substantial influence over, which documents were provided to
the outside auditors (Exhibits 2 8 , 4 3 , 4 4 , 4 5 , 4 6 ) .

S o , for example, with regard to Jaeger’s role in Enterasys
having improperly recognized revenue from its transaction with
Everest, the SEC says:
Jaeger’s involvement with books and records related to
Everest demonstrate his liability for violations of
Section 13(b)(5) and Rule 13b2-1 thereunder. The
revenue from Everest was reported in the second quarter
of fiscal year 2002 (September 2001), the quarter in
which Enterasys became a public company, and that
revenue helped Enterasys achieve the coveted $20
million it had been looking for throughout the quarter.
Jaeger was aware of the shortfall and the need to find
$20 million in revenue. Exh. 3 1 . Jaeger knew that
Enterasys achieved the $20 million in sales and that
Everest was part of the total amount. Exh. 4 3 . “Great
[effort last week] but the work is not over.” Jaeger
then dictated to the CFO of Enterasys what documents
should not be given to the outside auditor, KPMG. Id.
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Evidence shows that the documents for the Everest
transaction were not given to KPMG. Exh. 4 4 . Jaeger
reviewed the financial statements that were going into
the public filings for the quarter on September 1 6 ,
2001. Exh. 4 8 .
Memorandum in Opposition to Summary Judgment (document n o . 234)
at 2 4 .

And, with respect to Jaeger’s role in Aprisma’s improperly
recognizing revenue from its non-recurring engineering agreement
with iPolicy (which the SEC describes as a “round trip of cash”
from Cabletron to iPolicy), the SEC says:
Jaeger’s intent is also demonstrated by his conduct
with respect to iPolicy. In that transaction
accounting asked Jaeger for documents on June 4 , 2001
which was quarter close. Jaeger told accounting they
are just tying up loose ends but in fact, the
transaction documents had not even been signed. Exh.
4 6 . Aprisma improperly recognized revenue in the
quarter and iPolicy was one-third of that improper
revenue.

Id. at 2 5 .

The foregoing evidence, along with the addition evidence
cited in the SEC’s memorandum (document n o . 234) and its
statement of disputed facts (document n o . 235) is sufficient, if
credited by a trier-of-fact, to warrant the conclusion that
Jaeger violated section 78m(b)(5) and/or Rule 13b2-1.

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Conclusion
For the foregoing reasons, as well as those set forth in the
SEC’s legal memorandum and its statement of disputed facts, the
existence of genuinely disputed material facts precludes the
entry of judgment as a matter of law in favor of Defendant
Jaeger.

Accordingly, his motion for summary judgment (document

no. 224) is denied.

Jaeger’s motion to entirely strike the declaration of Steven
Henning (document n o . 248) is likewise denied.

The court is

aware of the requirements imposed by Rule 56 and, in ruling on
Jaeger’s motion for summary judgment, it has not considered those
portions of the affidavit offering inadmissible statements (e.g.,
FBI Form 302 reports) or inadmissible portions of the Henning
report.

SO ORDERED.

August 1 9 , 2011
cc:

All Counsel of Record

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